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BIT protections unaffected by EU law

Eastern Sugar B.V. v. Czech Republic: according to a tribunal constituted under the UNCITRAL Rules, protections enjoyed by foreign investors under the Czech-Netherlands Bilateral Investment Treaty are not superseded by the Czech Republic's accession to the EU.

Summary and business impacts

In its recently published award of 27 March 2007, the ad hoc arbitral tribunal held that Eastern Sugar, a Dutch investor, was discriminated against when Czech officials reduced its domestic sugar production quotas as part of the Republic's accession to the EU. This constituted a breach of the "fair and equitable treatment" provision imposed by the BIT. In reaching this conclusion, it did not allow the Czech Republic to rely on EU or domestic law to justify its breaches of the BIT. This highly significant principle may well be followed by future tribunals. It provides additional security to investors and should diminish concerns as to the effect of EU law on their BIT protections. This is particularly reassuring to investors given the EU's recent recommendation that Member States should formally rescind the approximately 150 intra-EU BITs currently in force.

Factual background

Eastern Sugar invested in Czech sugar producing facilities prior to market regulation. Between 2000 and 2004, the Czech government introduced various regulatory decrees designed to bring the sugar market in line with EU requirements. The First and Second Sugar Decrees provided for a national production quota, allocated to individual sugar producers. However, the State retained a discretionary "reserve" quota which it allegedly distributed to domestic sugar producers only. The Third Sugar Decree reduced the quota for producers which had closed factories. The State also actively encouraged the entry of domestic operators into the sugar production market, at the expense of foreign producers.

In June 2004, Eastern Sugar commenced arbitration proceedings claiming to be a victim of discrimination. It contended that the sugar decrees breached the provisions of the BIT and, in particular, that the Third Decree had been introduced by the Czech Republic to penalise it for closing down a sugar factory.

The Czech Republic contested the tribunal's jurisdiction by arguing that subsequent to its accession to the EU in May 2004, the BIT ceased to have effect and that the investor's rights were governed exclusively by the intra-EU investment regime under the various EU treaties.

Tribunal's findings

The tribunal rejected the Czech Republic's arguments and held that the BIT was not impliedly superseded by EU law since:

the two regimes did not cover exactly the same subject matter – the EU treaties conferred the right to invest, whereas the BIT conferred protections on the investor subsequent to the establishment of the investment;

the two regimes were not incompatible; and

it was not the common intention of the Czech Republic or The Netherlands that the BIT should be superseded by EU law

While the first two decrees were flawed and politically motivated, they did not constitute a BIT breach. The tribunal however concluded that Eastern Sugar had been unfairly "targeted" by the Third Sugar Decree. This action constituted a breach of the "fair and equitable treatment" standard and entitled Eastern Sugar to compensation of EUR 25,400,000.

In a partial dissenting opinion, one arbitrator considered that the First and Second Sugar Decrees also breached the "fair and equitable treatment" requirement. By enacting these decrees, in his view, the Czech Republic failed in its duty to provide the investor with a stable and transparent regulatory framework for its investment and failed to protect its legitimate expectations.

Conclusions: BITs not an insurance policy

This award is therefore of interest for two reasons. First it does not allow a host state to rely on EU law to evade its obligations under a BIT. In this way it echoes the findings in the case of Saluka Investments BV v The Czech Republic, brought under the same BIT, in which it was held that in providing State Aid in accordance with EU law, a host state was bound not to frustrate an investor's expectations to be treated fairly and equitably.

It is also an interesting addition to the debate surrounding a host State's exercise of legislative power. The tribunal's reasoning is not entirely clear on this point. Nonethless, investors should bear in mind that whilst they have the right to a certain stability and predictability in the legal environment within which they operate, BITs do not provide an insurance policy against all changes in the law affecting their investment. In most cases, only a significant abuse of legislative power or clear discrimination will constitute a breach of the BIT. This was the case with the Third Decree. Where investors have particular concerns in this regard, it is advisable (as pointed out by the ICSID arbitration tribunal in Parkerings-Compagniet AS v. Republic of Lithuania) to introduce a stabilisation clause in investment contracts to provide protection against unexpected and unwelcome legislative changes.

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